The Disadvantages of Downside Protection Strategies in Investment
What is Downside Protection?
Downside protection is a strategy adopted by investors to safeguard against potential losses, particularly in volatile or declining markets. It involves actions taken to mitigate the impact of a negative market movement on an investment portfolio. One common method is the use of options, which can be effective but come with significant costs and limitations.
However, Hedgeable (although not presented as such in the original text), focuses on a simpler, more affordable approach using cash or high-quality fixed income ETFs. This strategy avoids the complexities and added costs associated with options or other derivative instruments.
Why Hedgeable Chooses Cash and Fixed Income ETFs for Downside Protection
It is clear why Betterment and Wealthfront do not offer downside protection strategies using options. These platforms are designed to provide low-cost, commoditized investment options, which serves a significant portion of the market effectively. However, for those seeking a more customized approach, Hedgeable stands out by providing a range of benefits, including:
Simplicity and Cost-Effectiveness: Using cash or high-quality fixed income ETFs simplifies the investment strategy, reducing transaction costs and administrative complexities. No Added Costs: Unlike options, there are no additional fees or commissions associated with these traditional investment tools. Customization: Hedgeable allows for a more personalized approach to wealth management, including downside protection, impact investing, and alternative investments.The Efficacy of Commoditized Investing Platforms
The market for commoditized investing platforms, such as those offered by Betterment and Wealthfront, is dominated by the belief in passive index funds and low-cost beta strategies. This is driven by the success of companies like The Vanguard Group, which has built a multitrillion-dollar empire based on the power of indexing.
One of the main arguments for these platforms is the backtested evidence showing that, over time, market indices outperform a significant portion of actively managed funds. Additionally, they leverage the robust academic research, such as Modern Portfolio Theory (MPT), which emphasizes the concept of diversification and risk management.
Academic Support and Market Temptation
Markowitz’s MPT White Papers provide theoretical backing for the effectiveness of passive strategies. Furthermore, when the market experiences downturns, such as the 2008 financial crisis, proponents of passive investing often cite the resiliency of diversified portfolios.
Why Keep Fees Low? If you aim to build an asset-gathering business like Betterment or Wealthfront, maintaining low fees is crucial. Lower costs attract more customers, and simplifying investment choices appeals to a broader audience. This strategy is well-suited for individuals who prioritize simplicity and low-cost options in their investment portfolios.
Conclusion and Caution
Hedgeable’s approach to downside protection and other customized investment strategies highlights the importance of considering individual needs beyond just low-cost commoditized options. While passive index funds offer solid returns, the value of a tailored strategy can be significant for investors who wish to protect their capital during market downturns.
It is important for investors to carefully evaluate their needs and consult with a financial professional before making any investment decisions. Hedgeable offers a more customized approach, providing a balance between simplicity and the flexibility to address specific concerns, such as downside protection, impact investing, and alternative asset allocation.
Disclaimer: This is not a solicitation to buy or sell securities or an offer of personal financial advice. Past performance is not indicative of future performance. It is strongly recommended that you seek out the help of a financial professional before making any investing or personal financial management decision.